Quick Facts

Saudi Arabia’s economic freedom score is 59.6, making its economy the 98th freest in the 2018 Index. Its overall score has decreased by 4.8 points, reflecting a plummeting score for the fiscal health indicator and declines in property rights and judicial effectiveness. Saudi Arabia is ranked 9th among 14 countries in the Middle East and North Africa region, and its overall score is below the regional and world averages.

Stimulus spending drove Saudi Arabia’s budget deficit to nearly 14 percent of GDP in 2016. The government financed the deficit by selling bonds and drawing down reserves but later began to take steps to put the country on a more sustainable fiscal footing. Deficit-cutting plans include introduction of a value-added tax, subsidy reductions, and partial privatization of the state-owned petroleum company, ARAMCO. Additional reforms are needed to improve regulatory efficiency to attract investment and enhance the economy’s overall competitiveness.

Background

The birthplace of Islam and home to its two holiest shrines in Mecca and Medina, Saudi Arabia is an absolute monarchy ruled by King Salman bin Abdulaziz Al Saud, who succeeded his half-brother in 2015. Threats include the Islamic State, which has recruited many young Saudis, and sectarian tensions between Sunni Muslims and the Shiite minority. In 2015, Crown Prince Mohammad bin Salman (“MBS”) intervened in Yemen to help the government battle Iran-supported Houthi rebels. In late 2017, a crackdown on corruption by MBS plunged Saudi Arabia into a deep political crisis. Oil exports account for more than 85 percent of government revenues. Saudi Arabia is the largest exporter of petroleum and a leader of OPEC.

The legal framework protecting private property is subject to Islamic practices. The slow and nontransparent judiciary is not independent, and there is significant collusion between the executive branch and judges. Corruption remains a major problem, and there is both low transparency in the functioning of government and opacity with respect to state budgets and financial practices.

Saudi nationals or citizens of the Gulf Cooperation Council and corporations pay a 2.5 percent religious tax mandated by Islamic law. The overall tax burden equals 8.7 percent of total domestic income. Over the past three years, government spending has amounted to 40.0 percent of total output (GDP), and budget deficits have averaged 12.0 percent of GDP. Public debt is equivalent to 12.4 percent of GDP.

Business regulations are relatively streamlined, and the time necessary for incorporation has been shortened, but there is little movement toward further improvement. Immigrant labor is heavily regulated. The government has reduced its historically generous subsidies, such as its subsidies for gasoline, health care, schooling, water, electricity, and the banking industry, and plans further cuts.

Trade is significant for Saudi Arabia’s economy; the combined value of exports and imports equals 61 percent of GDP. The average applied tariff rate is 3.4 percent. Nontariff barriers impede trade. Government openness to foreign investment is below average. The financial sector has undergone gradual transformation, and some restrictions on foreign investment in financial services have been eased.